Dr. Kohl Quarterly Articles

Who is the U.S. Banker?

The U. S. federal debt is the topic of many conversations today worldwide. Interestingly, the federal debt level has nearly doubled since the Great Recession of 2008. Standing over $19 trillion, the federal debt is a closely watched metric; especially as a percentage of the gross domestic product (GDP).

The current federal debt is approximately 104 percent of the GDP. I often encounter the question, “Has this ever happened before?” Actually, yes this is not the first time federal debt has exceeded 100 percent of the GDP. During World War II, U.S. federal debt reached 121.7 percent. However, coming in second to World War II debt levels should not be any solace. When examined, this debt presents numerous serious issues.

During World War II, the federal debt was financed by citizens of the U.S. Campaigns with the infamous “Rosie the Riveter” ad were used to encourage U.S. citizens to purchase savings bonds. In fact, 88 percent of federal debt was internally financed and only 12 percent was foreign money. Well, 70 years can make a big difference. Today, the federal debt holdings are approximately 40 percent in foreign finance and 60 percent in U.S. banks.

So, who is the largest banker of the U.S.? As one might expect, China is the leading lender with approximately $1.25 trillion. Close behind is Japan at $1.2 trillion followed by a place of hot money, the Cayman Islands at $250 billion. Surprisingly, the Irish are next followed by Brazil, Sweden, United Kingdom and Luxembourg, which together total over $1.1 trillion. Next, Taiwan, India and Hong Kong register in at one- half of $1 trillion and remarkably, Saudi Arabia financed $120 billion of the U.S. federal debt.

In summary, Europe, Asia and the oil-rich nations of the world are large financiers of mounting U.S. debt. These variables must be considered as the U.S. more strategically and intentionally negotiates trade and military strategies in a very complex world.

When others hold your financial obligations it can represent less flexibility which will only be amplified if interest rates should rise worldwide. Fortunately for the U.S., global interest rates have been low for an extended period of time.

Actually, a normal global interest rate would be approximately 3 percent higher than the today’s posted rate. If rates were to normalize to that level, the interest on our national debt would be larger than the military budget. Perhaps, this topic would make a good line of questioning for the remaining national political debates.